https://economicstudents.com/how-companies-create-artificial-scarcity-to-drive-demand/
In many modern markets, products are seen to sell out immediately as soon as they are released. Consumers see limited quantities and long waitlists for new products that create immense demand. While these outcomes show an overwhelming number of consumer interests in one specific product, it also reflects on business strategies these companies use. In many instances, companies are seen to intentionally restrict the supply of their goods despite having the resources to produce significantly more. This is what economists describe as artificial scarcity, a strategy where companies strategically limit their supply in order to increase perceived value and create demand amongst consumers.
In basic economic concepts, demand is shown through a linear demand model, a standard graph that shows how quantity demanded decreases as price increases. In this context, firms try to sell as many units as possible with a price that maximizes profit. However, when companies create artificial scarcity, they intentionally limit that quantity available, which allows supply to meet full demand. By limiting the number of units sold, consumers perceive the product as valuable and increase their willingness to pay at a higher price.
Artificial scarcity can change the demand curve itself within a standard linear demand model by adding in an additional variable for change in consumer demand. Artificial scarcity increases the consumers’ perceived value of a product. This increases their willingness to pay, shifting the demand curve to the right. Therefore, the equilibrium point rises even if the product itself doesn’t change. When consumers perceive a certain product to be more rare and exclusive, their willingness to pay increases since scarcity can often show value. This allows many firms to charge higher prices despite selling fewer units. This strategy of limiting supply as well as influencing consumer perception enables companies to maintain strong demand and implement premium prices in order to fully maximize profit. These strategies have become common across various industries revolving around fashion, technology, and entertainment.
In today’s world, products produced in limited units, such as luxury bags or sports cards, are perceived to be worth higher value. The psychological reasoning behind this is that scarcity creates loss aversion, a cognitive bias where the fear of missing out on a product is psychologically worse than getting it. According to Medium, an online platform with articles from independent researchers, “Perceived value plays a crucial role in the economics of rarity. Consumers are willing to pay more for rare items because they believe that these products are worth the premium price.” This perception of rarity amongst consumers can significantly increase one’s willingness to buy and obtain the product, which shows how scarcity can become a major variable that shifts a linear demand model and the relationship of demand and price.
In modern market implications, real-world companies frequently use artificial scarcity as a marketing strategy. For instance, luxury fashion brands like Hermès intentionally limit their supply of products such as the Birkin bag. Consumers often are put into long waiting lists that can take several years. Strategies of these ensure that Hermès is able to maintain their exclusive identity and product prestigeness. Similarly, sneaker companies often release new shoes in limited quantities, often which are sold out within minutes of its release. These business tactics create competition among consumers, which reinforces the perception of the product being seen as highly valuable and exclusive. As a result, selling products with relatively small quantities ensures that firms are maintaining strong demand and generating profit.
However, artificial scarcity also has downsides; one primary reason how artificial scarcity can fail a business is because it often destroys consumer trust. Rather than increasing brand exclusivity, heavily limiting supply forces consumers to buy from major competitors or overpriced resellers. To illustrate, Supreme’s brand value collapsed after trying to maintain limited drops while simultaneously increasing their production. This made their scarcity feel fake and manipulative, causing consumers to leave and buy products from their competitors. Conversely, Patagonia took a different approach; they expanded their business by promoting product longevity, which made consumers pay at premium prices for higher-quality clothes, rather than items that are intentionally kept out of stock. Ultimately, artificial scarcity isn’t the only justification for a higher price. Consumers can often be more willing to pay higher prices for products that offer long-term durability rather than short-term status.
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